Business context and reporting period
STAG Industrial, Inc. is a REIT focused on owning and managing single-tenant, net-leased U.S. industrial properties. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013; balance-sheet comparisons are with December 31, 2012. At quarter-end, STAG owned 200 buildings across 34 states, totaling about 35.3 million square feet, and reported 94.0% leased occupancy across 180 tenants.
Financial and operating highlights
Amounts are in U.S. dollars; financial statement amounts below are rounded to millions.
- Revenue: Third-quarter revenue was $34.9 million, up 65% from $21.1 million in 2012. Nine-month revenue was $97.2 million, up 68% from $57.8 million. Growth primarily reflected acquisitions.
- Profit and per-share results: Third-quarter GAAP net income was $0.3 million versus a $4.9 million loss a year earlier; net loss attributable to common stockholders was $2.1 million, or $0.05 per share, versus $5.3 million, or $0.18 per share. Nine-month net loss was $0.3 million versus $7.8 million; common-stockholder loss was $6.3 million, or $0.15 per share, versus $9.3 million, or $0.43 per share.
- NOI and FFO: Third-quarter net operating income (NOI) excluding discontinued operations was $28.4 million versus $17.9 million. Nine-month NOI excluding discontinued operations was $79.2 million versus $48.3 million. FFO attributable to common stockholders and unit holders was $15.0 million for the quarter and $41.8 million for the nine months, compared with $7.8 million and $20.3 million, respectively. These are non-GAAP measures.
- Same-store operations: Same-store revenue decreased 1.0% in the quarter and 0.4% for the nine months. Same-store NOI declined 6.3% in the quarter and 4.9% for the nine months. Same-store occupancy was 92.5% versus 95.6% for the quarterly comparison, and 91.0% versus 94.7% for the nine-month comparison.
- Cash flow: Nine-month operating cash flow was $55.2 million, compared with $30.2 million. Investing used $234.9 million, mainly for property investment; financing provided $184.6 million. Cash and cash equivalents ended at $23.9 million, with an additional $6.8 million of restricted cash.
- Debt and liquidity: Total debt was $496.7 million at September 30, versus $479.2 million at year-end 2012. Debt included $226.7 million of mortgage notes, $20.0 million drawn on the unsecured revolver, and $250.0 million of unsecured term loans. The company reported $180 million of revolver capacity and $50 million available under the Wells Fargo term loan, subject to stated conditions. Management reported compliance with debt covenants.
- Capital and dividends: STAG raised $110.1 million net through a January common-stock offering and $67.8 million net through an April Series B preferred-stock offering; ATM sales generated $39.1 million net during the first nine months. Common shares outstanding increased to 44.1 million from 35.7 million at year-end. The board changed common dividends from quarterly to monthly, maintaining $0.10 per month ($0.30 quarterly equivalent) for fourth-quarter 2013.
Material changes versus the prior comparable period
- Acquisitions were the principal source of reported growth: STAG acquired 29 buildings totaling about 6.0 million square feet for net assets acquired of approximately $247 million during the first nine months. The company attributed increases in depreciation and interest expense largely to its larger portfolio and higher debt.
- Portfolio-level occupancy growth did not translate into stronger same-store performance: same-store occupancy and NOI declined in both comparisons. Management cited vacancies and tenant downsizing, partly offset by renewals, expansions, and new leases.
- Interest expense increased 51% in the quarter and 26% year to date. Total debt rose modestly from year-end, while common and preferred equity offerings funded debt reduction and acquisitions.
- The prior-year comparisons included a $3.9 million impairment loss on discontinued properties in 2012. No impairment loss was recorded in 2013; a $0.5 million gain was recognized on a 2013 property sale.
Outlook, risks, and unusual items
Management expressed a generally constructive view, citing limited speculative development, potentially improving tenant conditions, low interest rates, and acquisition opportunities. It expected acquisitions to support performance, but provided no quantitative earnings, revenue, or acquisition guidance. Management said operating cash flows and financing activities were expected to meet liquidity needs and described the balance sheet as adequate.
- Leasing remains a key risk: 2.1 million square feet was available, and tenant retention on leases expiring during the first nine months was 60.9%. One major lease expiring in the following year had been renewed for five years on 47% of the space, at flat rent per square foot.
- Rate exposure remains despite swaps: $200 million of $250 million in unsecured term loans was swapped to fixed rates; the filing identified $70 million of variable-rate debt at September 30. A 100-basis-point increase under the filing’s stated assumptions would have increased nine-month interest expense by $0.5 million.
- Other stated risks include tenant defaults or non-renewals, rent and occupancy declines, acquisition execution, refinancing and interest-rate changes, real-estate market conditions, natural disasters, insurance and environmental liabilities, and maintaining REIT status. The filing reported no material change in previously disclosed risk factors.
- On October 7, 2013, the company amended its Bank of America credit arrangements to lower borrowing spreads and unused fees. The company also reported no material legal proceedings and no significant recognized subsequent events.
Investor facts to verify
- Whether same-store occupancy and tenant retention stabilize, and how the available 2.1 million square feet is leased.
- Acquisition returns and funding needs relative to operating cash flow, debt levels, and equity issuance.
- Dividend coverage and the impact of preferred dividends, recurring capital needs, and monthly payment timing.
- Remaining unhedged rate exposure, borrowing availability, covenant headroom, and upcoming debt maturities.
- How reported FFO and NOI reconcile to GAAP results and compare with other REITs’ definitions.